How To Handle Legal and Compliance Issues When Dropshipping

Wondering how to handle your legal and compliance issues when dropshipping and why? Well, stop here because I got all the answers!

Dropshipping is a cost-efficient way of running an online business. It’s one of the fastest-growing types of eCommerce businesses, and it’s much easier to become profitable with dropshipping compared to other business models. 

While you don’t have to worry about stocking, shipping, or storing products, it’s important to know how to handle the legal and compliance issues associated with your dropshipping brand.

Its legalities can sometimes get pretty complicated, especially when you’re trying to sell internationally. 

In this article, we’ll dive deeper into learning more about how you can handle legal and compliance issues that are associated with your dropshipping brand. 

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Why Handling Legal and Compliance Issues When Dropshipping is Important?

Handling legal and compliance issues is a cornerstone of running a successful dropshipping business.

It not only keeps the business on the right side of the law but also builds trust with customers and partners.

Here are the critical areas where legal and compliance play a pivotal role:

✅ Adherence to Laws and Regulations

Operating in compliance with local and international laws is foundational.

For instance, if you’re dropshipping toys to the European Union, you must ensure they meet the EU’s strict safety standards and carry the CE mark.

This will indicate conformity with health, safety, and environmental protection standards.

So, ignoring such regulations can lead to fines, legal action, and a ban on selling in lucrative markets.

💡 Tip: Read my Step-by-Step Guide to Forming an LLC for Dropshipping.

✅ Protecting Intellectual Property Rights

Selling products that inadvertently infringe on intellectual property (IP) rights can have severe consequences.

For example, if you are dropshipping watches similar in design to a luxury brand, leading to a lawsuit for trademark infringement.

To avoid such pitfalls, it’s crucial to verify the authenticity and IP compliance of products before listing them on your platform.

✅ Consumer Protection and Satisfaction

Following laws related to consumer rights ensures customer satisfaction and avoids legal issues.

A common scenario is the sale of electronic goods that fail to meet the specific country’s safety requirements. Thus, this will result in returns, complaints, or even legal action.

Transparent product descriptions and adherence to consumer law, such as offering a minimum two-year guarantee for goods in the EU, can mitigate these risks.

✅ Data Protection and Privacy

In an era where data is king, respecting customer privacy and data laws is non-negotiable.

For example, a breach of the General Data Protection Regulation (GDPR) by mishandling European customers’ data can result in fines of up to 4% of annual global turnover or €20 million, whichever is greater.

So, implementing robust data protection policies and transparently communicating them to your customers is essential.

✅ Mitigating Financial Risks

Non-compliance can be costly, leading to fines and legal battles that drain your resources.

Consider the case of an online retailer fined for not collecting sales tax in a state where they have a physical presence, due to stored inventory.

Understanding tax obligations and setting up systems to comply with them can save a business from financial jeopardy.

✅ Reputation Management

The impact of legal and compliance issues on a brand’s reputation can be lasting.

So, let’s consider a dropshipping store that sells products that are later recalled for safety reasons. The news can quickly spread, damaging the store’s reputation and consumer trust.

Proactive compliance and quick response to any issues can help in managing and protecting a brand’s image.

✅ International Compliance

Navigating the complexities of international trade laws and regulations is crucial for dropshippers operating across borders.

For instance, it is a MUST to ensure compliance with the United States’ Importer Security Filing (ISF) regulation.

Thus, this requires submitting specific information to Customs before goods are shipped to the US.

Failure to comply can result in delays and fines, highlighting the importance of understanding and adhering to international trade requirements.

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How To Handle Legal and Compliance Issues When Dropshipping

Next in this article, I will guide you through a few steps that will help you keep your dropshipping business legal.

🔸 Acquire a business license 

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Running an online business without acquiring an eCommerce business license is the biggest mistake when dropshipping. This can lead to massive fines, closing down of your business, and even time spent behind bars. 

The most important step you can take is to look at the requirements of the country you live in.

Keep in mind that some countries allow you to run a dropshipping business without a license. However, this is until you hit a certain revenue level. 

For example, if you live in the United States, you can find which license is for you on the SBA website. Keep in mind that regulations change significantly from state to state.  

However, if you live in the Euro Zone and Switzerland, the procedure for acquiring a business license is almost the same.

However, any citizen of a country that isn’t part of the EU must have a valid residence permit when registering for a business license in the Euro Zone and Switzerland. 

If you live outside of these areas, it’s best to contact your local government and visit their website to learn more about licensing requirements for your dropshipping business. 

💡 Tip: Learn about Seller’s Permit vs. Business License: What Do You Need to Start Selling Online?

🔸 Use anti-money laundering (AML) tools to prevent fraud

Dropshipping is a fantastic option for online retailers who want to avoid overhead expenses and warehouse space.

However, everything isn’t always smooth since this type of business has a higher fraud risk.

The most common types of money laundering activities included in dropshipping are fraudulent chargebacks and purchases. 

Fraudulent chargebacks include the ‘’customer’’ falsely claiming they received a product and will initiate a chargeback to get a refund.

The product is already shipped, so the refund will mean that they get their money back and have the product. How terrible! 

On the other side, we have fraudulent purchases, which is when fraudsters use a stolen ID to make purchases.

In this case, even if the actual owner initiates a chargeback, the fraudster will get the order for free. 

These are the biggest money-laundering activities in dropshipping and the number one solution to solving them is to use anti-money laundering tools.

From the first step of the customer’s journey, AML tools are closely monitoring who the user is and if you can do business with them.

For example, LexisNexis Risk Solutions offers comprehensive data and analytics solutions for risk management, including AML compliance.👇

Their tools help in identity verification, risk assessment, and monitoring transactions for suspicious activities.

Here’s how the AML tools make sure fraudsters are caught early: 👇

• Customer onboarding: This is the first step of the customer’s journey and is important for establishing a secure and transparent relationship. AML tools will let you know if you can do business with an onboarding user. The AML screening lists allow you to check customers again on financial crime and sanctions watchlists. 
• Transaction monitoring: Transaction monitoring is an important component of fraud prevention. Monitoring high transaction amounts is never enough. But it’s a better idea to combine AML transaction monitoring practices with other data points that can give you much more accurate results and informed decisions in your dropshipping business. 
• Feedback: AML tools include Machine Learning (ML) technologies that focus on learning suspicious purchase behaviors, giving you real-time alerts, and learning from past fraud prevention activities. This will help prevent fraud much more effectively in the future. 

Fraud can not only harm your dropshipping business reputation but also allow fraudsters to get a hold of sensitive information, which breaches compliance with international data privacy regulators. 

💡 Tip: Read about Dropshipping Scams & How To Avoid Them As a Beginner.

🔸 Pay your taxes 

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The second you get your business license, it’s now time to pay your taxes.

After you acquire your business license, you’re going to have an Employer Identification Number (EIN). The government will use this number to find out if you are paying your taxes or not. 

You need to make sure you pay all taxes that are required by your local government. If you live in Europe or the United States, you can contact these two websites: 

The European Commission’s Taxation and Customs Union

It has a list of contact information regarding tax authorities in EU countries. So, keep in mind that countries outside the EU aren’t included in this list. 

The Internal Revenue Service (IRS)

Thus, this website accounts for the United States and guides you through tax laws in each state.  So, it is very important when it comes to how to handle legal and compliance issues when dropshipping.

If you live in another country, just visit your local government website and there will be a category including taxes you have to pay.

You can always send an email to governmental bodies that are responsible for local tax laws to learn more. 

Nevertheless, you can use eCommerce tools to automatically calculate taxes, so it’s best to use one if you want to save time. 

🔸 Comply with privacy policies 

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Your business is required to have an up-to-date privacy policy. Customers want the right to be informed of the data you are collecting from them, and to give them an opportunity to delete or modify their data whenever required.

Privacy policies are also on your side since they can help you out in case of a data breach, reducing the reputational damage your dropshipping business can suffer. 

The privacy policy you need to comply with will depend on which country and region you live in.

For instance, if you are selling in the European Economic Area (EEA), then the General Data Protection Regulation (GDPR) will apply to your business even if you aren’t based in Europe.

Therefore, it’s important to read more about international privacy regulators and see which rules apply to your dropshipping business. 

👉 Read about Dropshipping Taxes and Payments – Guide For Beginners.

🔸 Share disclosures with your customers

There’s one thing you don’t want to happen when you’re in dropshipping, and that’s to have unhappy customers.

Your dropshipping business needs to be protected from lawsuits as much as possible.

Therefore, you need to disclose the following information to them:  

• Refund policies: How will your supplier deal with refunds? Include your refund policy in every purchase and the number of days the policy is valid. 
• Disclaimers: If you are shipping a dangerous product, include a disclaimer on your product label or website. This warns the customer so they are aware of what to expect, and protects your business in case of a customer injury. 
• Terms and conditions: This should be included in every dropshipping business. It’s not obligatory but is an excellent way of protecting your business. 

Sharing disclosures protects your customers and business from trouble. This avoids any problems that can arise. 

🔸 Choose your suppliers carefully 

As a dropshipper, you are entirely dependent on your suppliers for storing, shipping, and fulfilling all of your orders.

So, it’s important to sign contracts with high-quality suppliers since there are many fake ones out there that can cause you to lose thousands of dollars if you aren’t careful.

The worst-case scenario is even having to deal with penalties for selling fake products that the supplier gave you. 

If you want to be on the safe side, your best option is to work with suppliers that you find from the supplier directories. You can sign up with a supplier directory.

These directories are all created by paid third-party organizations that keep records of different suppliers, including locations, the products they are selling, and the prices. 

For example, I personally use the Dropshipping.com supplier directory to find the best deals. Plus, the directory is huge, having over 2000 trustworthy suppliers.

Moreover, you can narrow down your search and quickly find suppliers in the desired niche, shipping costs, location, etc.

Also, they provide you with valuable insights about the suppliers like, shipping costs, location, MOQ requirements, product costs, processing times, and more.

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Keep in mind that all these directories aren’t free to use, but they help you learn more about who you are going to work with and if they are verified or not. 

👉 Check out the 24 Best Dropshipping Suppliers In The USA [General + Niche].

Keep everything legal – Final Thoughts

Dropshipping is a legal and legitimate form of eCommerce business.

Follow all the legal guidelines to acquire your business license, pay your taxes, read about the legal requirements on the platform you are dropshipping on, respect data privacy policies, and make sure you are choosing reliable suppliers. 

Dropshipping is a great way to do business and make some good money, but you want to make sure you are following all the rules while doing so.